[Why&Next] Economic Slump but Stock Prices Hit Record Highs... What’s Happening in Japan and the EU?

Stock Market Soars Mainly on Semiconductors, Hitting All-Time Highs
Decoupling Phenomenon Between Economy and Stock Prices Emerges
Japan's Stock Market Expected to Continue Strong Performance

Amid a sustained global stock market rally, Japan and Europe have attracted attention as their stock markets have ignited even during economic recession phases. Experts commonly attribute the rise in stock prices despite sluggish economies to the positive momentum from U.S. semiconductor company Nvidia's artificial intelligence (AI) semiconductors, though they observe that the sustainability aspect may show different patterns.

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Since the beginning of this month, Japan's representative stock index, the Nikkei 225, surpassed the 39,000 mark for the first time ever on the 22nd, reaching its highest level in 34 years, and has continued to set new all-time highs since then. The Nikkei index rose about 16% this year following a 28% increase last year.

The pan-European Stoxx 600 index also hit a record high of 497.25 on the 26th. Last week, Germany's DAX index (1.47%) and France's CAC 40 index (1.27%) also reached their highest levels, continuing the rally.

Experts point to the opening of the AI market and the significant rise in stock prices of related companies as the main drivers behind the strong performance of advanced foreign stock markets. Not only Japan and Europe but also the Taipei stock market in Taiwan hit record highs this month, largely due to the effect of TSMC, which exclusively supplies AI semiconductors to Nvidia.

In Japan, the recent strong performance of Nvidia's stock in the U.S. market has fueled expectations that semiconductor companies will benefit, intensifying investment enthusiasm in Japanese semiconductor stocks. In fact, many semiconductor companies in Japan, including Tokyo Electron, have led the rise in stock prices. Riding this momentum, global funds that exited the Chinese stock market recently have flowed into the Japanese stock market, influencing the rally.

Additionally, alongside quantitative easing, the Japanese government's corporate value-up policies that have continued for nearly a decade are also cited as a background for the stock price strength. The Japanese stock market has steadily risen since last year, supported by a weak yen and government efforts to enhance the corporate value of listed companies. Lee Jipyeong, a special professor at the Department of Convergence Japanese Area Studies at Hankuk University of Foreign Studies, said, “While corporate profitability is improving due to reforms such as the price-to-book ratio (PBR) reform measures for listed companies on the Tokyo Stock Exchange and emphasis on growth strategies, the stock prices have gained additional strength as a reflection of intensified U.S.-China frictions.”

In Europe, the recent smooth sailing of stock markets is led by semiconductor companies like ASML in the Netherlands and advanced pharmaceutical manufacturers such as Denmark's Novo Nordisk. This is also a result of IT-related stocks riding the AI rally, while traditional leading sectors like luxury goods have been supported by expectations of a recovery in Chinese demand. Oh Hanbi, a researcher at Shinhan Investment Corp., explained, “European stock markets, led by large-cap stocks, aligned with global stock market themes, and the revival of China's sluggish economic stimulus expectations has caused even existing leading stocks to rebound.”

Japan “Will Surpass 40,000” vs Europe’s Stock Market Bubble Concerns

Unlike the booming stock markets, the economies of each country are not smiling. This raises questions about the longevity of the stock market strength. Japan's economy recently entered a technical recession after recording negative growth for two consecutive quarters. Europe's economic outlook remains bleak. The European Union (EU) Commission recently downgraded the economic growth forecasts for the 27 EU countries, and the International Monetary Fund (IMF) has repeatedly lowered growth forecasts for major European economies such as Germany and France.

In fact, internal reactions in Japan remain lukewarm for these reasons. Some evaluations suggest that the surge in stock purchases by foreign investors is mainly due to the weak yen, and it is premature to say that Japan's own strength has increased. The British Financial Times (FT) also reported, “Although the Nikkei index has surpassed its highest record from 34 years ago, the atmosphere of euphoria or sense of achievement like back then has disappeared.” While the stock market has risen centered on large corporations, there is a gap with the financial situation of the general public.

Lee Changmin, a professor at the Department of Convergence Japanese Area Studies at Hankuk University of Foreign Studies, explained, “Although wages for employees of large corporations will rise and domestic investment will be made, it will take more time to lead to a virtuous cycle such as consumption expansion, given that 70% of Japanese workers currently work for small and medium-sized enterprises.”

However, since last year, Japan's relatively strong stock market performance is also influenced by fundamental factors such as improvements in corporate governance and macroeconomic conditions, leading to an analysis that the structural strength will continue somewhat more than in Europe. This is why expectations are growing that the Nikkei index could soon break through 40,000.

The Nihon Keizai Shimbun explained, “In 1989, the Nikkei price-to-earnings ratio (PER) was about 60 times, but now it is around 16 times, which is an appropriate level,” and noted that the current rise is structurally different from the bubble period. The Bank of Korea's Tokyo office also evaluated in a recent report, “The recent rise in Japanese stock prices is linked to movements in U.S. stock prices centered on tech stocks and is partly due to the weak yen,” but forecasted, “The ongoing efforts to enhance corporate value through improvements in corporate governance in Japan remain unchanged and will continue to act as a factor supporting stock price increases.”

On the other hand, in Europe, concerns are emerging regarding valuation (stock price levels relative to earnings). It is assessed that the recent rise was largely temporary, following the global stock market led by Nvidia.

A Bank of Korea Frankfurt office official said in a phone interview with Asia Economy on the 27th, “In Europe, manufacturing performance centered on Germany is currently supporting the market, but there are doubts about sustainability if exports slow down, and the outlook for the timing of interest rate cuts is highly volatile,” adding, “When viewed annually, it is a different pattern from Japan, where previously very low growth rates have gradually improved and investment sentiment has shown positive effects.”

This content was produced with the assistance of AI translation services.